Fixing The IRS

For decades the Internal Revenue Service tried but failed to modernize its massive data systems, but Doug Shulman finally has something to celebrate. When he became IRS commissioner in 2008, Shulman set out to rectify a key technology project, which had fallen years behind schedule and was tens of millions of dollars over budget. Now the goal that eluded the agency for more than 20 years—the conversion of taxpayer data to a modernized database—has become a reality.

On Jan. 17, the IRS flipped the switch on its new Customer Account Data Engine, known as CADE 2, moving the data of 140 million taxpayers to a 21st century computing environment. Successor to the failed CADE 1 project, the new system allows the agency to update taxpayer accounts and process returns on a daily basis rather than weekly, which was the case with the Individual Master File. As the main repository for taxpayer data for more than 50 years, the IMF relied on 1960s-era software and a flat file structure in which data was arrayed in spreadsheet rows. Accounts were stored sequentially so that information for taxpayer number 100,000,001, for example, could be accessed only by skipping through the first 100,000,000 accounts. Huge tape drives have long been the most prominent piece of hardware at the IRS’ computing centers.

CADE 2, in contrast, is a relational database in which accounts can be accessed directly. Daily updates help ensure that when a taxpayer calls, the account information available to the customer service representative is no more than 24 hours old. Refunds for those who file electronically can be issued in as few as five days, compared with 10 to 17 days previously.

Critics might point out that most private and many public organizations transitioned from flat file to relational databases 15 to 20 years ago. Considered in this light, CADE 2 seems less an achievement than an indicator of technological backwardness. Yet those who have participated in the modernization journey recognize that the size and complexity of the IRS’ databases, as well as the many constraints within which a federal agency must work, should be taken into account.

The CADE 2 milestone occurs at a time when the government’s most visible and scrutinized agency can point to other important achievements in 2011.

Slightly more than 77 percent of individual taxpayers filed their returns electronically, close to the goal of 80 percent set by Congress. The IRS seems certain to achieve that goal within the next year or two.

Seventy-three percent of individual tax filers surveyed in the American Customer Satisfaction Index expressed satisfaction with the service they received from the IRS, up from just 51 percent in 1999.

The IRS’ score in the annual “Best Places to Work in the Federal Government” survey conducted by the Partnership for Public Service, a nonprofit think tank, increased to 68 (on a scale of 100) from 56 in 2003. Although there is still room for improvement,

it is a significant achievement for a production operation such as the IRS that has to compete with more glamorous missions at places like NASA and the intelligence agencies.

Taming the Beast

These recent successes stand in sharp contrast to where the IRS stood 15 years ago. In October 1997, a Newsweek cover story titled “Behind the IRS Curtain” reported on Senate Finance Committee hearings at which taxpayers and whistle-blowers presented a picture of an agency that provided indifferent service and routinely abused the citizens it was supposed to serve. Although some of the worst accusations later turned out to be unfounded, the experience convinced Congress, as well as many in the agency, that reform was in order.

When Congress passed the Internal Revenue Service Restructuring and Reform Act in 1998, it set the stage for a transformation as thorough and as dramatic as any in recent government history. Key elements included:

nConverting the agency’s geographically based configuration to four major operating divisions, each responsible for a separate group of customers. In the old structure, authority was decentralized to the district level; in the new structure, key operational decisions are made at the division level.

nEmploying a strategic approach to tax administration featuring risk management techniques and collaborative relationships with stakeholders. Under the new Compliance Assurance Program, for example, IRS auditors work with corporations to resolve tax issues before a return is filed. The program reduces uncertainty for taxpayers and allows the IRS to shorten the audit cycle and improve timeliness. The Volunteer Income Tax Assistance program promotes partnerships with community-based organizations to staff more than 12,000 sites where 3 million low-income taxpayers receive help annually in filling out their tax returns.

nLaunching a new system of performance measures, in which the traditional emphasis on business metrics has been balanced with indicators of service quality and employee satisfaction. “I see in our executives, our senior managers, our front-line managers and our employees more discussion about the connection between business results, the customer experience and employee engagement,” says Beth Tucker, deputy commissioner for operations support. “I can tell you that when I came onboard 28 years ago that was not engrained as part of a normal conversation.”

nRecruiting outsiders for key leadership positions as a means of changing the agency’s insular culture. Charles O. Rossotti, who was commissioner from 1998 to 2002, paired an outsider with an insider at the top of each operating division.

‘The Eagle Has Landed’

Technology issues are at the core of the IRS’ modernization effort. The agency’s first major attempt to update its data systems began in 1988. But Congress cut off funding for the program in 1995 after concluding that much of the $3.5 billion spent had been wasted. In 1998, under heightened oversight from Congress, Rossotti launched the Business Systems Modernization program in which the IRS partnered with a consortium of firms led by Computer Sciences Corp. It was estimated that BSM, which included 11 information technology projects, would take 15 years and $7 billion to complete.

By 2004, however, modernization efforts were again off track. According to the Government Accountability Office, five of the projects were behind schedule and exceeded cost estimates by significant amounts. CADE 1, the centerpiece of the program, was projected to exceed its estimated price tag of $98 million by $37 million, and it was 30 months behind schedule. GAO found multiple management flaws, including inadequate definitions of systems requirements, increases in project scope, and deficiencies in cost and schedule projections.

Observers say the problems stemmed from the scope of both the challenge and the program. Paul Cofoni, CSC’s vice president at the time, put it in perspective at a House Ways and Means Committee hearing in 2004. “In my 30 years of working in the technology field, I have never encountered any program of the size and complexity of the Business Systems Modernization program at the IRS,” he told lawmakers. The central conclusions from an internal review were that BSM, as originally conceived, was too ambitious and the IRS had ceded too much control to the outside consortium. The program was later scaled back and the agency took on a greater management role.

By the time Shulman became commissioner, CADE 1 had missed several key milestones. The completion date had been pushed back from 2013 to sometime between 2018 and 2022. Shulman was not prepared to go to Congress and ask for hundreds of millions more dollars for a program the fruits of which wouldn’t be available for another decade. He and his team made two key decisions: focus exclusively on the CADE project to the exclusion of other downstream applications included in BSM, and bring management of the program in-house.

According to IRS Chief Technology Officer Terry Milholland, whom Shulman recruited from Visa International in 2008, the IRS had become too dependent on outside vendors. “There was no direction, no plan, no ‘how do all these pieces play together,’ ” Milholland says. “The IRS was no longer in charge of its own destiny. So, what we said was we have to know our own stuff; we have to be accountable for our own processes, our own technology.”

Under Shulman’s leadership, the project was turned around. “We broke a cycle of batch processing that had been done for 50 years the same way and that is now being done in a day,” Milholland says. “We’ve taken an amazing amount of waste out of the system.” Deputy Commissioner Tucker recalls, “The day we stood this up and we had our first successful overnight, somebody from Terry’s team made the connection with the man landing on the moon, saying, ‘The eagle has landed.’ ”

David Powner, GAO’s director of information technology issues, describes CADE 2 as “the key to modernization.” Putting taxpayer data in a more accessible format will enable the IRS to develop applications that customer service representatives, auditors and tax collectors need in their day-to-day dealings with taxpayers. In 2011, GAO listed the program as one of seven successful major IT acquisitions across government, an achievement Powner attributes to strong management and oversight, and “executive-level focus and attention.”

From Keystrokes to Kilobytes

Another technological development that has huge implications for the way the IRS conducts business has been the trend toward electronic filing of tax returns. In 1998, Congress set the bar for e-filing of individual tax returns at 80 percent by 2007. The IRS missed that goal. But in 2009, Congress gave the program a boost when it passed a law requiring tax preparers who handle 10 or more returns per year to file electronically. The percentage of e-filers jumped from 67 percent in 2009 to 78 percent in 2011.

The switch to electronic filing saves the IRS tens of millions of dollars annually. It has allowed the agency to scale back processing centers from 10 to three. The processing cost per electronic return is 17 cents, compared with $3.66 for paper returns that must be entered manually in the agency’s database. Electronic filing also boosts accuracy and reduces the time employees spend resolving transcription errors.

To encourage e-filing, the IRS has had to reassure electronic filers they are not at any greater risk of being audited than those who file by paper. The agency captures 100 percent of the data from electronic returns in its database, while it captures as little as 40 percent of the information from paper returns. To level the playing field, the IRS uses only 40 percent of the data from electronic returns for enforcement purposes. As the volume of paper returns diminishes, the agency plans to begin capturing 100 percent of tax data, whether from paper or electronic returns. This move is expected to boost efforts to reduce the tax gap—the amount of taxes owed but not paid.

Busy Signals

In 1997, the National Commission on Restructuring the Internal Revenue Service reported that only 51 percent of taxpayers calling the agency’s toll-free line with questions got through to a customer service representative during the filing season. The panel directed the agency to “review and restate its mission to place a greater emphasis on serving the public and meeting taxpayers’ needs.”

The following year, the agency consolidated 70 call centers into 26 interconnected sites, allowing callers to be transferred to customer service representatives based on availability. Training programs and automated tools were developed to help employees answer tax law questions. The IRS’ internal Customer Service Representative Level of Service rating—the

proportion of callers who get through to an assistor—improved from 51 percent to 87 percent in 2004.

But ratings dipped again in 2008—to 53 percent—when the IRS sent checks to more than 100 million households as part of President Obama’s economic stimulus program and call volume doubled. Service leveled out to 72 percent in 2011, but average wait times increased to 12 minutes, compared with five minutes in 2007. According to Steven T. Miller, deputy commissioner for services and enforcement, the decline reflects resource constraints and continued high call volume. The IRS budget dropped to $11.8 billion in fiscal 2012, a $300 million decrease from the previous year. The president’s fiscal 2013 request includes an additional $1 billion, but most of the increase would be allocated to enforcement rather than to service.

Call volume has increased exponentially with new programs that involve payments and tax credits to citizens and businesses, such as the economic stimulus and health care reform. Key stakeholders, including the IRS Oversight Board and National Taxpayer Advocate, have urged Congress to increase agency funding to help it manage expanded responsibilities. “The IRS has been tasked with a wide range of new responsibilities under the Affordable Care Act, such as the administration of new credits for individuals and businesses and additional information reporting,” the board said in its fiscal 2012 budget report to Congress. In recent report, National Taxpayer Advocate Nina Olson noted the “imbalance between workload and resources” is unmanageable and impairs the agency’s ability to serve taxpayers and collect taxes.

Shulman doesn’t buy the argument that the agency’s mission has expanded; he says all the new responsibilities are tax-related. “Every time something happens, we keep saying there are other people who can do it and people will say, ‘We actually trust the IRS to get this done.’ That’s what happens behind the scenes. So, I think this agency should be quite proud of that,” he says. “It’s just we need to make sure we get the resources to get it done.”

For the remaining year of his term, Shulman plans to focus on enforcement and workforce initiatives begun under his stewardship. In 2009, the IRS introduced continuing education requirements for the 750,000 professional tax preparers across the nation. The field has been largely unregulated; many preparers lack training and some have been exposed for unethical conduct. Shulman sees the initiative as an opportunity to leverage the IRS’ limited resources in the interest of improved compliance.

“When I came in there were just under 100,000 [IRS employees], which seems like a lot, but not when you’re squaring off against 200 million-plus filers,” he says. “If you can get that industry, which is engaged with 80-plus percent of the filings that happen, on the same page around service and compliance, that’s a huge point of leverage.” The IRS targets preparers responsible for the highest incidence of noncompliant returns for outreach and education.

Perhaps Shulman’s highest priority is the staff of professionals under his own roof. With his Workforce of Tomorrow program, Shulman aims to make his agency the best place to work in government. Currently ranked 65th out of 240 federal agencies, the IRS has a ways to go. Just by setting the goal, Shulman hopes to communicate to employees his commitment to improving their quality of work life.

“Having people who show up every day, feel engaged, feel like their bosses add value—which means they push them, they support them, they take care of poor performers—that you’re learning and developing skills, and that you’re engaged and feel respected in the workforce,” he says, “if you focus on all those things, it’s a prerequisite to an institution working well.”

James R. Thompson is an associate professor of public administration at the University of Illinois-Chicago.

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